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Union Customs Code: VAT Alert

As of May 1, 2016, the Union Customs Code (UCC) came into effect, replacing the prior Community Customs Code
(“Community CC”). The UCC has direct effect in all 28 Member States of the
European Union (EU).

The UCC addresses a broad range of customs matters and also has
significant implications for import VAT, says Daan
Arends, a tax partner with DLA Piper in Amsterdam.
In particular, it is relevant to the taxable base of imports for VAT purposes.
Businesses that engage in imports and exports should be aware of the new “last
sale” rule for valuing imports, and the broader circumstances pursuant to which
customs value includes licensing fees and royalties.

Last Sale
Rule

Customs value is relevant for determining customs duties and calculating
import VAT, both of which are generally imposed on the entry of goods into free
circulation within the EU.

Under the prior Community CC, importers could use the value of an
earlier sale in a supply chain as a basis to determine customs valuation if the
sale was destined for the EU under the so-called “first sale for export” (FSFE)
rule. This was a useful rule, since the price of a transaction earlier in the
supply chain is generally substantially lower, as profit margins of transactions
further down the supply chain are excluded. As a result, considerable customs
duty savings could be achieved.

Now, under the UCC, the relevant value is the value of the supply
"immediately before the goods were brought into the customs territory”.
The relevant sale for goods brought into the EU is the sale when crossing the
border, i.e., the ultimate sale taking place at that time, in performance of the contract of sale. This rule can dramatically
increase the importer’s liability for customs duty and import VAT in cases
where the FSFE was previously used.

The exact
implications of this new rule remain unclear as strict interpretation would
lead to a situation where profit margins of transactions between EU-established
traders need to be included in the customs value. Although recent Commission
guidance (TAXUD B4/
(2016) 808781) suggests that such EU
domestic sales “do not qualify as sales for export to the EU", uncertainty
remains as to when traders are effectively established in the EU and how to
deal with branches of non-EU established businesses.

To comply with the last sale rule, customs agents responsible for
importation into the EU should now be aware of all sales transactions occurring
before the moment of release for free circulation.

License
Fees and Royalties

Under the Community CC, royalties and license fees were generally only
taken into account in the customs value if they related to imported goods and
were paid by the seller as a condition of their sale. Because of the way the
rule was applied, royalties and license fees were often not subject to customs
duty or VAT.

Under the UCC, royalties
and license fees are assumed to be paid as a condition of sale under a broader
set of circumstances, including if the goods cannot be purchased by the buyer
without payment of the royalties or license fees to a licensor.

Specifically, royalties and
license fees are assumed to be paid as a condition of sale, in the absence of
evidence to the contrary, if any of these conditions are met:

The seller or a person related to the seller requires the buyer to
make the payment;

The payment by the buyer is made to satisfy an obligation of the
seller, in accordance with contractual obligations; or

The goods cannot be sold to, or purchased by, the buyer without
payment of the royalties or license fees to a licensor.

Note that the licensor is not necessarily the supplier of the imported
goods.

Additionally, the special
conditions for the adding trademark royalties to the customs value have been
deleted. While such trademark royalties
were generally not treated as subject to VAT and customs duty under the Community
CC, they are also now treated as dutiable under a broader set of circumstances.

This rule could trigger import VAT and duty on license fees, for
example, if a Dutch wholesaler imports shoes from Vietnam for a low price, and
must pay a license fee for the rights to distribute that brand of shoe. If the
condition of sale requirement is met, the royalties should be added to the
customs value.

Planning
in Light of the UCC

In light of these
developments, Arends advises businesses engaged in imports and exports to
review their supply chains to consider how they may be affected by the new
rules. Various steps may be taken to mitigate their impact. For example:

Certain transitional rules apply with respect to contracts
concluded before January 18, 2016. Under these rules, importers may continue
to value imports by reference to the FSFE rule until December 31, 2017.

It may be desirable to
import goods into the EU at an earlier phase of production, where their value
is lower.

It may be feasible to amend royalty or
licensing fee agreements so that that the basic conditions (i.e., that the
agreements are related to the goods and are a condition of sale) are not
met. Although there can be various situations where payment of royalties
or license fees are considered a condition of sale when paid to an
unrelated third party, there is no assumption that royalties and license
fees are automatically includible in the customs value.

More proactive planning may
also be feasible, although taxpayers should bear in mind that this is an area
of increased surveillance by revenue authorities.

Postscript:
The Implications of Brexit

Supplies between EU Member States are not subject to the UCC, because
these supplies are Intra-Community dispatches and acquisitions, rather than
imports or exports.

Further to the U.K. Brexit vote on June 23, 2016, the U.K. is in the
process of terminating its EU membership. Once the U.K. renounces its status as
a Member State, the UCC will no longer be directly applicable to imports into
the U.K. – whether from EU Member States or from third countries – unless the U.K.
opts to include the UCC in domestic legislation. On the other hand, supplies of
goods from the UK to EU Member States, which are currently treated as
intra-Community transactions, will be treated as imports subject to the UCC
from the standpoint of the importer.

By Joanna Norland, Technical Editor,
Bloomberg BNA, with contributions from Daan Arends, author of the Netherlands
chapter of the Bloomberg BNA VAT Navigator.

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